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Eliminating some certainty to the earnings model of the Restaurant Industry

The increased volatility of the commodity markets is adding an increased level of complexity that most restaurant companies would rather not have to deal with. Today, both Darden and Sonic talked about floating some of their key commodity exposures.

Darden announced that given the environment, there is less opportunity to enter into long-term contracts with their food suppliers. Also, Sonic said that the cost of entering a long-term beef contract was prohibitive so they are now floating their beef exposure.

As it relates to Darden, the company will be buying futures contracts in the open market to hedge their exposure to certain commodities. While this is new to restaurants, companies like General Mills, Tyson and Kraft have long hedged their costs. From an accounting standpoint, Darden will be required to mark-to-market its futures contracts each quarter. The volatility of these future contracts will pass through the income statement and may overshadow the company's true underlying operating performance. The company would rather continue to lock in these costs though longer term contracts, but given the volatility of the commodity market, many of the suppliers to the restaurant industry don't want to take that risk. Naturally, this puts some of the risk back on the industry participants to manage the process and consequently, eliminates some of the certainty over commodity costs that many restaurant companies have enjoyed.



FED VIEW: Give Fisher Bernanke's Job...

No change to the Fed Funds rate.

So the easy money game in the US market lives to play another day. Dallas Fed President Fisher dissented. Fisher's timing is right, and Bernanke's continues to be off. Timing is everything. Bernanke remains in a political box, pandering to Washington and Wall Street.

Bernanke's confusion will ultimately breed contempt. Maybe not today, but soon enough. I am actually long the market for a "Trade", but will be selling into strength now. Bernanke wasn't in the area code of being hawkish enough here. It's going to be a long summer...

My call is that if Obama wins, Bernanke will be gonzo in 2009. Fisher wants Bernanke's seat, and he made the right call today by nudging his foot in the door.
KM

India Raises Rates For the 2nd Time in 2 Weeks

I recently covered my short position in the India Fund (IFN) as I thought, from a "Trade" perspective, after seeing a -19% two month swan dive in India's market, that it was finally oversold.

Today, India did what they needed to do, chasing down the inflation run rate, by raising interest rates by another 50 basis points to 8.5%.

At +11% year over year, inflation is running at least 300 basis points over India's slowing economic growth rate. This proactive move by India's central bank should, at the very least, stop the hemorrhaging that they continue to see in the value of their local Rupee currency.

Stocks are discounting mechanism of future news. Now that inflation readings and the appropriate rate hikes are yesterdays news, it's less obvious for me to be running aggressively net short India.
KM

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Spanish Inflation Spikes To A 23 Year High

More of the same today coming out of Europe on the inflation reporting front. This will beget further beating of the Wall Street consensus inflation war drums that have finally arrived!

Spain's Producer Price Index for May came in at +7.9% year over year, up from April, and hitting a 23 year high.
KM

(picture: http://www.abc.net.au/reslib/200707/r159503_581874.jpg)

Asia Is Slowing? Really? Thanks

This morning, the head of the Asian Development Bank officially cut his estimates for Asian GDP growth in 2008. While our inflation call has morphed into consensus, our "global stagflation" call has not. This revised estimate is another nice admission however, taking consensus closer to reality.

A few weeks back, Goldman also downgraded their Asian Equity market view on select countries. After Vietnam lost 2/3 of its value, and China was down 50% from its October 2007 peak, we gave that a golf clap. That call, like many sell side strategy calls, was a revisionist and reactive one.

Since Q4 of last year I have been calling for Asian growth to be adversely affected by inflationary pressures and social unrest, in addition to the 2nd derivative effects of a US economic growth slowdown.

Asia's aggregate GDP growth for 2007 ended up close to +9% year over year. Look for the revisionist historians to pop into your inbox day by day now, reflected on that being the top in this global economic cycle's growth.

It is global this time, indeed.
KM

Marking Your Home To Market, Part Deux

This entire notion of Wall Street "marking to model" really stung the likes of the currently employed Dick Fuld and the legion of CEO's at legacy investment banks who have been fired. Now we're moving this trend to Main Street, and we are focused on marking American Net Wealth to market.

The two factors in the model that remain most relevant are A) your portfolios and B) your homes.

If you have more than one of A) and/or B) and its levered, that's probably not good, particularly if either are still "marked to model."

This morning US New Home Sales for the month of May came in lower again month over month at 512,000 versus 525,000 in April. I expect these numbers to decline throughout the summer months and not trough until Americans mark their homes to prices that a realistic market will bear.

KM

(picture: http://a.abcnews.com/images/US/rt_foreclosure_071101_ms.jpg)

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